Top 25 stocks for the NEXT 25 years: SourceForge -- LNUX

In my continuing series of the top 25 stocks for the NEXT 25 years, the next company is SourceForge (NASDAQ: LNUX). The company just changed its corporate name from VA Software to SourceForge, but has elected to retain its original NASDAQ ticker symbol of LNUX. SourceForge was founded in 1995 as VA Linux Systems and sold primarily Linux-based hardware systems.The company has transformed itself these past few years and recently sold off its unprofitable software business.

LNUX departed the software business to focus on the on-line business. SourceForge is made up of two major divisions: on-line media, which is made up of Open Source Technology Group, a network of technology related web sites that generates revenues by selling advertising on the web sites, and E-Commerce, which sells consumer goods targeted to the massive technology community. The principle web site is ThinkGeek.

The recent quarter saw ThinkGeek improve its sales by 31% as it shipped over 84,000 orders. The products are "rather geeky" toys and accessories that appeal to the tech world of ... aah ... geeks. The traffic to the site is now up to 200 million unique visitors this past quarter. Geeks do buy this stuff!

SourceForge's on-line media campaigns are driving growth as well. With over 30 million unique visitors and 1.6 million registered users, SourceForge is able to offer quite a community for any technology company wanting to advertise. The site is so tech-driven that the quality of visitors and registered users is superb and exactly what the tech companies desire: an educated potential buyer.

SourceForge has cleaned up the unprofitable software business and is now focused on its core competencies. I estimate revenues for 2007 at $51-52 million growing to $60 million and $76 million for 2008/2009 respectively. The earnings per share should be about $0.10 this year followed by $0.20 and $0.32 for 2008/2009. These numbers could prove to be quite conservative.

The operating margins for SourceForge should also ramp up quite well. Currently I estimate operating margins at 6% this year and going to 18-19% by 2009. The leverage in the financial model is just beginning to yield results.

The on-line marketing/advertising sector is growing at 35-40%. Recently, Google (NASDAQ: GOOG) announced its intended acquisition of privately held DoubleClick and Microsoft Corp. (NASDAQ: MSFT) is acquiring aQuantive (NASDAQ: AQNT). As SourceForge continues to build its revenues and unique visitor traffic the franchise becomes only more and more valuable. The technology world is huge and obviously populated by well-trained individuals. The traffic numbers should only continue upwards and on-line advertising revenues more high-margin driven due to the scale in the model.

SourceForge is at the start of a mega-growth cycle in its development and has the opportunity to become a significant, relevant player in the sector.

Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas please visit the web site.